[quote=Scarlett][quote=esmith]
If he goes FHA and puts 3.5% down, instead of doing conforming and putting 20% down, and he invests the difference (16.5% of purchase price) into CDs (returning 3% annually), he’ll receive the amount equal to 0.5% of house price per year in interest from CDs. Which is equal to what he pays in mortgage insurance to FHA.

Caveats:
– Interest from CDs is taxable, FHA mortgage insurance is not tax deductible
– FHA comes with an up front premium
– FHA has higher interest rates

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Thanks esmith… Now when I read it again, it was clear… sorry, sleep deprived…
I guess it’s a question of comfort/peace of mind and how much you are willing to pay for that…if one would like to have more cash reserves, and not lose all the 20%down…In his case, 10% down and still paying some PMI and the rates may not be that much better than FHA it may not be that much worse going with the FHA. The upfront premium is the sucker.

[/quote]

Exactly. My point wasn’t that it was free (all esmith’s caveats are correct), just that it costs less than it appears at first glance. Though I think mortgage insurance is now deductible if you meet the income limitations (we don’t), though I suppose that may apply to PMI only, not the FHA’s program.

Rates for conventional are not much better than FHA – the rates I’ve been seeing are less than a quarter point difference, if that. The upfront premium is the big catch, but that’s really the only one – FHA mortgage insurance is cheaper than PMI on a annual basis outside of the upfront premium.